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on Financial Markets |
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Issue of 2014‒01‒10
four papers chosen by |
| By: | Jiaqi Chen; Michael L. Tindall |
| Abstract: | In this paper, we estimate alpha for major hedge fund indexes. To set the stage, we examine several alternative methods for replicating Hedge Fund Research Inc. hedge fund indexes. The replication methods include stepwise regression, variations of the lasso shrinkage method, principal component regression, partial least squares regression, and dynamic linear regression. We find that the lasso methods and dynamic regression are superior for generating hedge fund replications and that the performance of the replications corresponds closely to that of the respective actual indexes. Using these superior replications provides us with a solid platform for estimating alpha. We find that at the height of the financial crisis, the alphas computed with our methods were generally negative; in early 2009, when the stock market was rising, alphas were generally positive; and in the recent environment of low volatility and low interest rates, the alphas computed with our methods were generally close to zero and tended to exhibit low volatility. |
| Keywords: | Regression analysis |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:fip:feddop:2013_002&r=fmk |
| By: | Wall, Larry D. (Federal Reserve Bank of Atlanta) |
| Abstract: | The Basel capital adequacy ratios lost credibility with financial markets during the crisis. This paper argues that failure was the result of the reliance of the Basel standards on overstated asset values in reported equity capital. The United States’ stress tests were able to assist in restoring credibility, in part because they could capture deterioration in asset values. However, whether stress tests will prove equally valuable in the next crisis is not clear. Some of the weaknesses in the Basel ratios are being addressed. Moreover, the U.S. tests’ success was the result of a combination of circumstances that may not exist next time. |
| Keywords: | Basel capital ratios; stress test; financial crisis |
| JEL: | E50 G01 G21 G28 |
| Date: | 2013–12–01 |
| URL: | http://d.repec.org/n?u=RePEc:fip:fedawp:2013-14&r=fmk |
| By: | Min Zhang (School of Management and Engineering, Nanjing University, China); Adam W. Kolkiewicz (Department of Statistics & Actuarial Science, University of Waterloo, Canada); Tony S. Wirjanto (Department of Statistics & Actuarial Science, School of Accounting & Finance, University of Waterloo, Canada); Xindan Li (School of Management and Engineering, Nanjing University, China) |
| Abstract: | We investigate the nature of sovereign credit risk for selected Asian and European countries based on a set of sovereign CDS data over an eight-year period that includes the episode of the 2008-2009 global financial crisis. The principal component analysis results indicate that there exists strong commonality in sovereign credit risk among the countries studied in this paper following the crisis. In addition, the regression results show that commonality is importantly associated with both local and global financial and economic variables. There are also important differences in the sovereign of credit risk behavior between Asian and European countries. Specifically, we find that foreign reserve, global stock market, and volatility risk premium, affect Asian and European sovereign credit risks in the opposite direction. Lastly, we model the arrival rates of credit events as a square-root diffusion process from which a pricing model is constructed and estimated over pre and post-crisis periods. The resulting model is used to decompose credit spreads into risk premium and credit-event components. For most countries in our study, credit-event components weight more than risk-premiums, suggesting that, in the long term, investors are perhaps more concerned with the prospect of sovereign-specific credit events than systemic sovereign credit risks. |
| Date: | 2013–12 |
| URL: | http://d.repec.org/n?u=RePEc:rim:rimwps:62_13&r=fmk |
| By: | Thi Hong Van Hoang (Groupe Sup de Co Montpellier Business School, Montpellier Research in Management (MRM)); Hooi Hooi Lean (Economics Program, School of Social Sciences, Universiti Sains Malaysia); Wing-Keung Wong (Department of Economics, Hong Kong Baptist University) |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:afc:wpaper:05-13&r=fmk |